Bombay High Court rules in favour of Vodafone

The Bombay high Court has ruled in favour of Indian unit of Vodafone Group Plc in a INR 3,200 crore transfer pricing dispute. The Court stated that there is no taxable income coming from issuance of shares. The Vodafone India Services Pvt. Ltd. Was involved in a case where the Income Tax department had accused the company of under-pricing the shares in a rights issue to the parent firm for fiscal 2009-2010 and had issued a show-cause notice to Vodafone India in January.
Transfer pricing is defined as the price at which divisions of a company based in different countries, transact with each-other to ensure a fair-price is levied. The judgement correctly addresses the question of applicability of transfer pricing law to share issuance and has thwarted the blatant attempt of tax authorities to tax hypothetical income. The verdict endorses a unanimous view that the income tax authority has no case to defend the transfer pricing adjustment due to undervaluation of share prices. It goes to support the view that income should be generated in the first place to lead to such provisions. It also ensures that secondary adjustment proposed by the tax authorities by re-characterisation of premium as loan is not valid. It is important, as it has wide-scale repercussions on international firms involved in similar tax disputes in India. Even, many Indian companies are contesting such disputes.
The verdict at large will serve as a major boost to the foreign investor sentiment and result in higher FDI for India in future. The industry has welcomed the same and now it remains on the government to accept and abide by the same.